The best way to retain talent is to align the interests of employees with those of the business. This can be achieved via your employee experience, career progression or development opportunities and providing a genuine work-life balance.
To ensure protection, companies should also consider the use of reactive tools.
Long-term and short-term incentives
One option is to use long-term incentives that defer the payment of an incentive over multiple years. Led by listed and financial services firms, these tie in employees until the scheme pays out, and beyond if the benefit is subject to clawbacks. Clawbacks can apply where, for example, it later emerges the financial metrics used to assess the incentives were overstated or some evidence of wrongdoing were uncovered by the scheme participant.
Long-term incentives can involve complicated drafting periods. As well as ensuring the terms are clear to the signatory, employers will often assess the tax consequences and make sure the clawback is enforceable.
As with everything, balance is required. If all incentives are deferred, it may not retain those looking for an immediate return on their efforts – or who are susceptible to approaches (and signing-on bonuses) from competitors.
Notice and garden leave
A longer notice period could also be considered. While it may raise the costs of notice, it can also help in two key ways. First, the length of notice defines the amount of time an employee spends on garden leave. Garden leave excludes an employee from the market and trade connections. As garden leave is easier to enforce than post-employment restrictive covenants, a longer notice buys longer protection.
Second, a long notice period may deter a competitor from offering employment, particularly if the employee is also subject to post-termination restrictive covenants.
Post-termination covenants can prevent an employee from working in a competitive business, from soliciting or dealing with actual or prospective customers, and poaching key employees for defined periods of time after they leave the organisation.
While attractive, the starting point is that all such provisions are unenforceable restraints of trade. They are only enforceable insofar as the employer can prove it has a legitimate interest in restricting the particular employee and that the restrictions go no further than is necessary.
It has become common to include restrictive covenants in an employment contract in some cases just for deterrent effect. The harsh reality is, however, that enforcing covenants is expensive and time consuming.
If you do not intend to enforce these in the event of a breach – or if you have included covenants without any thought as to the reasonableness of these, their value as a retention tool is limited.
Once your bluff is called or a court refuses to enforce a covenant, the deterrent effect is often lost. Likewise, the more regularly an employer waives the covenants when an employee leaves, the more it is communicating it has no intention to hold staff to them.
A well-drafted and considered covenant is a powerful tool. If threatened with injunctive proceedings, employees are often reluctant to breach their restrictive covenants, particularly with the added prospect of paying their employer’s legal costs (given that costs follow the event).
Using covenants as a blanket or commonplace contract clause can risk over-reliance. Employers should therefore consider clauses protecting confidential information and intellectual property, as well as restrictions on the activities that employees can undertake while at the company.
No matter which tool you pick, winning the war for talent will require balance and flexibility in your financial incentives and the way you restrict employees during and after their employment.
Andrew Secker is a partner at Mills & Reeve